How to switch from a regular mutual fund plan to a direct plan?

Investing in mutual funds is a hassle-free and straightforward process, and there are two ways in which an investor can make his mutual fund investments, and many investors remain confused about which to choose.

Aug 18, 2018 06:08 IST India Infoline News Service

Investment, SIP
Mutual fund investments are becoming a popular alternative compared to the traditional avenues of investment like Provident Funds, bank fixed deposits (FDs), and so on. Investing in mutual funds is a hassle-free and straightforward process, and there are two ways in which an investor can make his mutual fund investments: the direct route or the regular fund route.

Let us take a closer look at both:

Direct route/plan: Through this route, the investor can directly invest in mutual funds through an Asset Management Company (AMC), third-party intermediary, or a registered Transfer Agent like CAMS or Karvy. The investor also has the option to invest offline or online. The direct route has the advantage of lower expense ratio, but the investor has to choose the best mutual fund for himself. The net asset value of mutual funds here is higher than regular funds.

Regular funds: In regular funds, the investor invests through a mutual fund distributor who continually researches the market and recommends the best mutual funds to the investor. Regular funds are suitable for investors who are new to the market or do not have the requisite time to follow and research the trends of the market.

What is the difference between direct and regular plan?

Features Regular funds Direct Plan
Expense ratio Higher Lower
Net Asset Value Lower Higher
Returns Lower due to deduction of commission Higher as there is zero commission
Guidance The intermediary will provide advice The investor has to depend on self-guidance
Research An experienced fund manager will steer the fund The investor has to analyze the market
Documentation All paperwork will happen through the intermediary The investor is in charge of the paperwork
Switching from regular funds to direct plans:

An investor can switch from regular funds to direct plans in two ways.

Online method

Log in online to your AMC- or agent-provided mutual fund account. Choose the “Transaction” page, i.e. the page where you can buy, sell, or redeem your mutual fund units. Choose the “Switch” option and select the mutual fund you want to invest in by choosing the “Direct Plan” option. The switch will be reflected in a maximum of four days.

Offline method

In the offline method, you will have to visit the AMC’s office and fill the “Switch” application by entering your Folio number and fund name. Once the processing is complete, the AMC will you send the updated details. You can avail the offline method even through your existing intermediary.

Benefits of switching from regular funds to direct plan

In the direct plan, investors get the advantages of higher net asset value and lower expense ratio for their mutual fund units. Sebi introduced this scheme of investing in 2013 to encourage investors to take their own financial decisions without the help of professional advisors.
The main advantage of this method is that there is no commission involved and thus, it has a lower expense ratio. This investment avenue is more suitable for investors who are market-savvy.

Bottom line

If an investor switches from the regular fund to the direct plan route, he/she would have to sell their current investments and purchase new investments. However, if the investments are in a lock-in period, then one would have to wait for the same to expire.

Many mutual fund schemes also have exit loads applicable, so investors need to ensure that the application of exit load does not decrease the redemption amount, and in turn, the amount for the direct plan.

The taxation rates are the same for regular funds as well as direct plans. Both investment routes attract either short-term capital gains tax or long-term capital gains tax when being redeemed for the switch to the direct plan route.

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